The ghost of Christmas past haunts the high street

As the internet boiled over with rage this week about the “banning” of Iceland’s Christmas advert, my first thought was “why not ban them all?”

I have had my fill of the schmaltzy consumer claptrap broadcast by the big retailers in the hope that we will open our hearts (and our wallets). They can try all they like with the cute kids, fluffy penguins and Elton John tinkling the ivories — I won’t be heading to a shopping centre this Christmas.

We are told that shopping is a fun leisure activity, or worse, “shoppertainment”, but I’m not buying it. Negotiating the traffic, the crowds, identikit chain stores, overpriced mall restaurants and vile piped music to buy yet more stuff for people you love is not my idea of a weekend well spent. Whatever the time of year, I would rather shop online or from independent retailers on my local high street.

Figures this week showed over 18 per cent of the UK’s total retail spend happens online. Price transparency is one reason I prefer it — but the biggest attraction is the time savings it unlocks. Whether you’re buying presents, clothes or groceries, it is so much more convenient if your shopping comes to you.

This shift in consumer behaviour is now entrenched in the valuations of commercial property companies. Real estate investment trusts (Reits) that own shopping centres are being punished, whereas those that own logistics parks and warehouses — the infrastructure supporting online purchases and deliveries — are booming.

Segro — the whizzy name for what used to be the Slough Estates Group — is the chief beneficiary of shoppers’ changing habits. Shares in this Reit trade at a 5 per cent premium to net asset value (the book value of its property assets, minus debt and other net liabilities) as investors think online shopping has much further to go.

By contrast, the share prices of some Reits with exposure to bricks-and-mortar shopping centres and retail parks trade at discounts of more than 40 per cent. With so many retailers in trouble, investors increasingly expect shop rents and asset values to fall.

Two Reit majors took the knife to retail valuations this week, though the exercise was more akin to scraping a pat of butter than slicing the leg off a turkey.

LandSec, whose assets include a stake in the gigantic Bluewater shopping centre in Kent, took a 3 per cent writedown on its retail portfolio, and British Land, which owns half of Sheffield’s Meadowhall, took a 4.5 per cent hit. These Reits trade on discounts of 37 and 32 per cent, respectively.

“Acknowledgment of the collapsing economics of retail property has only just begun”, predicts Mike Prew, property analyst at Jefferies, who called the sector a sell in mid-2015. If struggling high street chains have a bad Christmas, retail property writedowns will get a lot worse.

Still, some investors hope to profit from any pain. Three traditional retailers with significant property exposure — Debenhams, Marks and Spencer and Pets at Home — are currently among the most shorted UK shares. There are plenty of ailing retailers actively engaged in brinkmanship with their landlords, as they attempt to cut stores and renegotiate rents. If landlords cave in, this undermines rents and valuations across their wider portfolio. But if they stand firm, they could be left with the problem of an empty shop.

This week, House of Fraser’s new owner Mike Ashley said he would close four more department stores after landlord Intu — a Reit trading on a 28 per cent discount, with its largest shareholder trying to buy the business — refused to slash rents.

Intu said it hopes to use the four stores House of Fraser is leaving behind for “new and exciting alternatives”. Which begs the question — what will be the anchor store of the future?

Mary Portas, a woman famed for channelling the consumer zeitgeist, had some answers at an FT property conference this month. She predicted that health and wellbeing could be the trend that saves the high street. People would travel to use amazing gyms, spas, yoga studios — and once there, would socialise, eat, have a coffee and possibly do some shopping.

These activities are great examples of what I call “Sycdo” — something you can’t do online, like buy a cappuccino. Another one is proper customer service, which explains why both Debenhams and House of Fraser are investing heavily in personal shopping services and in-store beauty counters.

Back to Christmas. I may not be buying people smelly candles and novelty socks, but I have been buying experiences. My sister-in-law and I have bought each other tickets for a cookery course. My mum and dad will buy me RSPB membership, and I will buy them the same for the British Museum. I’m taking my stepchildren to the Crystal Maze Experience, and my best girl friends for an indulgent meal out. My twin nephews have had deposits paid into their Junior Isas all year, so they will be getting nothing more than a tangerine in a sock on Christmas morning.

What the Reits and the retailers would really like for Christmas is reform of the UK’s outdated business rates system

But what the Reits and the retailers would really like for Christmas is reform of the UK’s outdated business rates system. Spending is shifting further online, but bricks and mortar stores are much more heavily taxed than the websites and warehouses sending out online orders.

The £400m proposed “tech tax” for digital businesses announced at the Budget could raise is a drop in the £28bn business rates ocean — the lion’s share of which is paid by the retail sector.

David Atkins, chief executive of Hammerson, a retail-focused Reit trading at a 40 per cent discount, suggested at the conference that an “online delivery tax” would be a better way of spreading the burden. True, this would hit the likes of Amazon, Asos and Ocado — but it would also penalise bricks-and-mortar retailers like John Lewis who have poured investment into their online operations.

The uncomfortable truth is that just as the business rates system has failed to adjust to the changing patterns of consumer spending, neither has the shopping centre.

Claer Barrett is the editor of FT Money. Email: claer.barrett@ft.com; Twitter: @Claerb